Sunday, 10 June 2012

Looking at Winter Fuel Payments without looking at the basic pension has no logic, either economic or moral

The case for withdrawing the Winter Fuel Payment (and free bus passes) from better-off pensioners appears to have united all parts of the political and intellectual spectrum, from the Sun's argument that we should "stop wasting money on rich pensioners who don't need it" to the Independent's complaint that "hundreds of thousands of very well-off people of advanced years who are being subsidised out of general taxation." It is supported by respectable centrist think-tanks such as the Social Market Foundation and CentreForum. Indeed, is widely accepted that the only block to removing this absurd and wasteful subsidy to rich oldies is political - the Prime Minister's reluctance to renege on an explicit pre-election pledge, incorporated into the Coalition Agreement, particularly after the Budget fiasco over the "granny tax".

This apparent consensus should give us cause for thought. In fact those who argue for means-testing these benefits, as if it were an easy way to raise a billion or two, are almost without exception ignoring, whether deliberately or through ignorance, the real and much larger issues about the UK benefit system and the welfare state as a whole.

Broadly, the system includes two types of benefits:

universal benefits, available, if you satisfy the eligibility conditions, regardless of income, such as the WFP, basic state pension, child benefit (until next year), and (going beyond the benefit system) the NHS

means-tested benefits, like Housing Benefit, Pension Credit, and Income Support, which you can only receive if you have a low income (and which are withdrawn as your income rises).

Now there are arguments, both economic and moral, for and against both universal and means-tested benefits. Means-testing, obviously, allows the government to target resources on those who need it. However, it also requires complex mechanisms to calculate and enforce the means-test, may stigmatise those who receive means-tested benefits (some of whom may therefore be put off from claiming) and crucially reduces incentives to work and save (since the higher your income, either now or from your future pension, the lower your benefit). Universal benefits, while being much more costly, and "wasting" money on those who don't "need" it, avoid these problems; more broadly, it is argued from a political economy perspective that they encourage social solidarity and generate a sense of collective ownership of the welfare state.

These arguments have been going on since the birth of the welfare state and there are no right answers; in recent years, under both Labour and Conservative governments, there has been a steady shift to means-testing (the expansion of tax credits, the steady erosion in the value of the basic state pension compared to earnings). But the welfare state continues to have a very large universal component.

And it is essential to look at the system as a whole. The key point here is that the vast majority of those who get the Winter Fuel Payment also get the basic state pension (there are some anomalies, in particular that it starts at age 60 rather than pension age, and is non-taxable). Both are non-conditional cash payments (there is of course no obligation on any pensioner, rich or poor, to spend their WFP on "fuel" or heating). Both are funded from general taxation (the so-called National Insurance Fund has long been a Treasury accounting fiction). Essentially, the WFP is just an add-on to the basic pension - a way of boosting it a little (£4 a week or so) without changing the uprating mechanism.

So what is certain is that looking at the WFP in isolation from the basic pension has no logic at all - neither economic nor moral. Joan Bakewell complains here about Robert Plant's WFP, and certainly he doesn't need it to heat his Primrose Hill home. But equally he's unlikely to need his state pension to buy food, yet she seems to have no problem with that at all. If there is a view that there should be no universal benefits for pensioners, so we stop "wasting taxpayers money" on the rich ones, then that is a perfectly consistent and logical position - but its main target should be the basic state pension. In other words, the money we are "wasting on rich pensioners who don't need it" is not just the WFP's £200 a year, but the state pension's £5,000 odd. The basic state pension, as well as all the other universal benefits for pensioners, could be abolished, with less well-off pensioners falling back on pension credit. That would save real money - even though without the state pension the majority of pensioners would be on pension credit, the savings would still be tens of billions of pounds per year.

But no-one, so far as I am aware, is proposing this. Apart from constituting a massive expansion of means-testing, it would do huge damage to incentives to save for future pensioners. Knowing that most low to middle income earners would be on pension credit after retirement, the real return on savings for most would be negative. The potential damage, both to individuals and macroeconomic, would be substantial.

So what those who are arguing for means-testing WFP are really saying is that the basic pension of £5,000 or so is OK as a universal benefit, but there's no case for an extra £200 on top of that. But what's the logic in that? There is no magic about the current level of the basic pension. Indeed, by historical standards it remains low. This chart shows the value of the basic pension plus the WFP compared to average earnings over time (a bit rough and ready given varying uprating dates, but the basic picture is accurate).

Even after adding in WFP, the basic pension remains at historically low levels compared to earnings. Hence the Turner Review's proposal to link it to earnings in future, and the Coalition's "triple lock" which guarantees that it should be uprated by the maximum of earnings, RPI, and 2.5%; the objective being to increase incentives to save and take more people out of means-tested benefits. The Turner reforms, in particular, were welcomed across the political spectrum, including by many of those who are now calling for the means-testing of WFP.

The UK needs a proper debate about the welfare state, the respective roles of universal and means-tested benefits, and how they interact with incentives to work and save. The private pension system is broken - the fixation on the alleged excessive generosity of public sector pension schemes detracts from the real issue, which is that private employers have shifted both the costs and risks of pensions to employees, resulting in massive underprovision - a real pensions time-bomb. Meanwhile, the botched means-testing of child benefit - so that we now have two separate means-tested child benefits, with one means-test applying to those on lower-middle incomes, and another applying to those on upper-middle incomes, and bizarrely high marginal tax rates applying to both - shows what happens when simplistic calls for "taking benefits away from the rich" are applied without thinking through the consequences. The current fixation on relatively marginal aspects of the welfare system is not just intellectually inconsistent but risks further tinkering that will do nothing to address the real issues.